India’s major economic reforms were spurred by a foreign exchange crisis. It was the summer of 1991 when foreign exchange reserves went to nearly zero. An emergency loan from the IMF was taken, and a slew of reforms were initiated. Exchange rates, import duties, and banking were deregulated, and Foreign Direct Investment was permitted. The biggest bang reform was the end of the license raj in manufacturing and industrial production. Economic growth picked up, and foreign investment poured in. The IMF loan was repaid in less than two years. The stock market and capital markets took off. Ten years later, a second generation of reforms was unleashed in the telecom and power sectors. This, too, led to remarkable growth and dynamism. To this day, we are reaping the harvest of the telecom revolution, which is still unfolding.
The economy is now more than ten times bigger than in 1991. India is a global software powerhouse. But one big promise of the 1991 reforms remains unfulfilled – an exponential growth in the manufacturing sector. It did grow, but only at the GDP’s pace. The share of manufacturing in India’s GDP is roughly the same in 2025 as in 1991, around 16-17%. The aspiration is to reach at least 25% as per the National Manufacturing Policy, the Competitiveness Project, and even Make in India. But manufacturing is stubbornly stuck, and as a result, industrial employment also has not taken off. Formal employment, which is covered by a contract and assures pension and health benefits, has a stagnant share of the total workforce. For India to achieve higher levels of aggregate growth and jobs with higher productivity and wages, industrial jobs must grow in a big way. We cannot achieve 8-9% growth without vigorous industrial growth.
The popular view is that archaic labour laws have held back massive industrial employment creation. Especially in labour-intensive sectors like textiles, footwear, toy-making, electronics assembly, we have not been able to build scale in manufacturing, as businesses hesitate to hire workers on a large scale. The labour reforms we needed relate not only to ease of recruitment at scale and retrenchment, but also to formalising labour markets. Since labour is in the concurrent list of the Constitution, respective state governments, too, have to be on board with the reform agenda. The unions have to be part of the consensus as well.
The Union government’s ambitious, five-year journey towards reform has reached a milestone with the four Labour Codes – the Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020), and Occupational Safety, Health and Working Conditions (2020). These codes replace 29 central labour laws that had accumulated piecemeal over the past seven decades. The notification marks the culmination of a reform process initiated in 2015, with years of tripartite consultation and delay due to states’ rule-making responsibilities under the Constitution. This landmark reform will reduce compliance burdens, widen social protection, and make the labour market more responsive to a changing economy. The respective states must now pass their own rules and regulations to ensure the codes are fully implemented within their jurisdictions.
These codes are meant to protect labour, to provide flexibility to employers, to formalise the workforce, and to spur job creation. For employers, the new regime promises ease of compliance: a single registration, licence, and return instead of dozens; higher thresholds for layoffs and closures; and fixed-term employment enabling time-bound hiring. For workers, it offers wider protection: a national floor wage, written appointment letters, health and safety coverage, maternity and provident-fund benefits for gig, platform, and contract labour. For the State, it offers a path to formalisation: digitised e-Shram cards, portable benefits, and a unified inspection and facilitation system.
It takes more than laws
The codes try to replace the rigid dualism of India’s labour market, where a small formal segment enjoys heavy protection and elite status, while the vast informal majority has none, with a continuum of graded protections linked to digital identity and compliance. This continuing and entrenched dual structure, called “casualisation of labour”, has sometimes had an ugly and violent manifestation, endangering social stability and harmony too. There is also a great step to enable better participation of women in the formal workforce.
Some of the features of the reforms are that all workers must now receive appointment letters, ending informal oral contracts. There is universal social security extended to gig and platform workers, with aggregators contributing 1-2% of turnover to welfare funds. Women may work night shifts in all sectors, including mining and IT, provided safety measures are assured.
We must remember, however, that these reforms do not automatically imply a dynamic and growing labour market. Employment generation depends on far more than labour laws. The unemployment challenge arises from skills mismatch, inadequate infrastructure, rigid land markets, and policy uncertainty as much as from labour regulation. The new codes can reduce transaction costs, but cannot by themselves create demand for labour.
This is because large-scale job creation also requires (a) Human-capital development: expansion of apprenticeship programmes and skill certification; (b) improvement in infrastructure, logistics, efficient transport, reliable power, and digital networks; (c) predictable taxation, faster dispute resolution, and simplified compliance across regulatory fronts, not just labour. Without these enablers, easier hiring and firing may only formalise precarious jobs rather than expand stable employment.
Yet laws alone do not create jobs. A dynamic labour market does. And so does a workforce equipped with human capital for the 21st century. India’s employment renaissance will depend on skills, investment, and productivity growth as much as on codified rights. If this reform is accompanied by parallel investments in education, skilling, infrastructure, and enterprise support, it could indeed become the cornerstone of inclusive growth.
(The writer is an economist; Syndicate: The Billion Press)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.